Valuation issues

Someone once asked me how to value companies. Valuations done are never right. However, it is important to be approximately right than precisely wrong. For that reason, Me and Manpreet always feel that valuation should be done conservatively.

Here are some pointers to note:

1) Don't overestimate growth rates! In fact try to underestimate them for future years!

2)Use some form of sensitivity analysis with reference to the discount rate use

3) Since the beta concept is utter nonsense, i suggest using a discount rate of 8% - 15% to find a range of intrinsic values with regards to discounted cash flows

4) Terminal value growth rate should approximately be 2% because long term growth rate of GDP in the US is approximated at 2%

5) If possible, dont even impute a terminal value in the model! If the price is drasitically below a model without terminal value, it is a screaming buy!


You can use online valuation calculators to help you and here are some resources if you are a newbie to the game:

1)http://www.moneychimp.com/articles/valuation/buffett_calc.htm